Cost of goods sold – What is cost of goods sold?

The term cost of goods sold (COGS) refers to the costs that go into creating the products that a company sells or the costs of acquiring goods to sell.

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Cost of goods sold refers to the stock costs of the goods that a company has sold over a particular period. The COGS is determined by the stock valuation method that is used by the company, such as first-in first-out (FIFO), last-in first-out (LIFO) or average cost.

The cost of goods sold includes all of the costs associated with a purchase. If the company in question sources goods from other factories, then their COGS includes the costs of conversion and other costs incurred in bringing the stock to their present location and condition.

If a company manufactures their own goods, then their COGS will include material, labour, and allocated overhead.

In financial accounting, COGS will appear on the profit and loss statement and is deducted from a company’s revenue to calculate its gross profit margin.

Determining costs of goods sold

A basic method of calculating COGS is to take a company’s beginning stock for a certain period, add the total stock purchases made over the period, and then deduct the ending stock balance. This calculation provides the total amount of stock/the cost of stock that has been sold by the company over the period.

For example, if a company starts with £20,000 of goods in stock, makes £10,000 in stock purchases and ends the period with £15,000 in stock, then their cost of goods sold for the period is £15,000 (£20,000 + £10,000 - £15,000).

To determine COGS, a company must keep detailed records of goods or materials purchased, as well as any discounts they may receive on purchases.